Japan’s Gree moves mobile gaming into the spotlight at E3 (interview)

Japan’s Gree put mobile social games into the spotlight at this year’s Electronic Entertainment Expo (E3) in Los Angeles by taking over the giant booth space that was once used by console game publisher THQ. Gree has become a billion-dollar company with its mobile social games network and is in the midst of a big international expansion. The company launched its first U.S.-made game in March and has launched a $50 million advertising campaign to create a beachhead for its mobile social network in the U.S. To put that number in perspective, $50 million is what Sony spent launching the PlayStation Vita handheld gaming device.

Gree is coming into the market at a time when the cost of acquiring new mobile users is rising, and it is in a race to establish a billion-dollar business in the U.S. in competition with DeNA, the Japanese rival that acquired mobile game publisher Ngmoco. To give itself an edge, Gree bought mobile social gaming network OpenFeint for $104 million last year and Funzio this spring for $210 million. We caught up with Naoki Aoyagi, chief executive of Gree International, at E3. He believes that mobile game market leadership is up for grabs now and the battle will be decided in the next 18 months. Here is an edited transcript of our interview.

GamesBeat: So tell us about your first E3.

Naoki Aoyagi: We are very excited. This is a very good time, because we just launched our global platform. It’s a good time to show our commitment to the Western market. We are pretty excited to see the new audience and the booths here. We just had a big party with more than 500 people.

GamesBeat: How many games do you have here?

Aoyagi: We have 21 games. We have a combination of Western games and games from Japan, both first parties and third parties. The third parties include the ones from Japan and other companies like CrowdStar in the U.S. and Vostu from South America. We wanted to give the message that we are going global with a great variety of content. I think you can see some of that from our content portfolio. We’re very happy.

GamesBeat: So this is part of a big marketing campaign, I guess? Can you describe that?

Aoyagi: It is actually the beginning of the big marketing campaign. We’re still in open beta in the Western market for our mobile gaming network, so we still need to do some work. But after the beta period, we plan to have a robust information campaign. We did a trial campaign in March with Zombie Jombie (pictured right) and Alien Family. Those are two of our new titles. We have gotten a lot of knowledge since then about the user distribution in the western market in general.

GamesBeat: I think you mentioned you would spend $50 million on advertising. Is this booth a part of that [laughs]?

Aoyagi: This booth is not a big part of that. It’s actually only about seven digits a year. But we do support the mobile user acquisition, and that cost is going up.

GamesBeat: It’s kind of symbolic that THQ gave this up and you guys picked it up.

Aoyagi: Yeah. Just yesterday I had a very good talk with the CEO of GameLoft. They provided one game for our lineup already. I think he was pretty happy with our booth and our coming into the Western market.

GamesBeat: How much of the campaign has already started and how much of it is going to come later?

Aoyagi: We just started with existing titles, both Zombie Jombie and also the games from Funzio. So eventually we’ll migrate all the titles, existing Funzio titles, to the GREE brand. We only have those titles. But now you saw in the booth that we have a lot more games coming very soon. It’s going to be busy over the next two, three months.

GamesBeat: I guess everybody wonders if Gree has gone crazy, because it’s spending a lot of money. But I suppose if you make a lot of money, you can spend a lot of money.

Aoyagi: We feel really confident about the monetization in the Western market after we shipped Zombie Jombie. Actually, the up-down number of Zombie Jombie is pretty strong. I think in the Western market, most of the applications, they have like five cents to ten cents. But the number we have…

GamesBeat: Is that per…?

Aoyagi: Per daily active user. It’s actually more than ten times that. It’s a pretty strong number. And even compared to the ones in Japan, it’s very close. The number is similar to the success we’ve had in Japanese social games. So in terms of monetization, everybody was very skeptical about what we’re doing, what we’re trying to do. But Zombie Jombie hitting the top-ten grossing, I think, two weeks ago showed what we could do. Some of the techniques and knowledge we built in the Japanese market are working already.

GamesBeat: How long did it take to become a billion-dollar company in Japan?

Aoyagi: Let’s see, a billion dollars. We started in mobile, social gaming in 2007, and then we hit the billion-dollar market cap two years later. 2009. In revenue, we hit a billion dollars in 2011.

GamesBeat: I know that most people don’t know that story. Most don’t know how big your company is.

Aoyagi: They were surprised, right? We became profitable in 2010, and then our revenue growth both in number of users and also in the average revenue per paying user (ARPPU) started growing dramatically.

GamesBeat: I guess some people have been worried about the rising cost of acquiring each new mobile game user, especially on iOS. But if you have a high lifetime value, then you don’t care about those rising costs as much.

Aoyagi: If we have a very good number in monetization, we can even justify a one-dollar or two-dollar user acquisition cost. And then based on the number we have with Funzio’s products and Zombie Jombie, in the very near future we can justify even higher than that. So that’s actually the competitive advantage we have right now.

In Japan, with very high ARPPU games, we do lots of TV campaign promotions. We justify that with those high ARPPU games. We are trying to do the same in the US market. We’ve acquired knowledge and experience in the last year, both on user acquisition and those trials.

We’re okay. It’s very good for us. It’s going to be our competitive advantage against other people. The contrast with other developers like Zynga is very clear. They’re now acquiring users, through OMGPOP’s acquisition, by buying games and users. They bought them so they could get Draw Something. But our approach is a bit different. The final goal, user acquisition, is the same. But our way is more marketing-driven. It isn’t hit-game driven. It’s a hit content business, but still, our approach, I think, is more stable.

GamesBeat: You acquired Funzio because they’ve had multiple hits, not just one hit?

Aoyagi: Yeah.

GamesBeat: I guess it seems like the Western market is still so focused on the console business. Your market capitalization is $3.7 billion. EA’s stock market value is just $4.2 billion. That’s very close.

Aoyagi: [laughs] Ah… I’m not sure?

GamesBeat: I don’t know what you call it, but our GamesBeat 2012 conference is all about the crossing over from one market to another market. It seems like the valuations in the traditional market have stayed pretty low, or gone down, and mobile is up, social is up. When you cross over from one market to another, you get very interesting things happening, like you could buy up a lot of the traditional companies that have been much larger historically.

Aoyagi: Once we prove ourselves in the Western market, there will be a valuation adjustment. It’s going to happen.

GamesBeat: Do you call that something like market arbitrage, I guess? Or geographic arbitrage?

Aoyagi: The Asian market valuations, like Chinese MMO companies, have had low valuations. They are five times to ten times lower compared to the U.S. market. But we see some adjustment after the Facebook IPO, the Zynga IPO. Even the US market has dropped some.

GamesBeat: You had the complete gacha problem in Japan. (Japan’s Consumer Affairs Agency declared a certain kind of gambling-like play to be illegal, affecting both Gree and DeNA).

Aoyagi: Oh, yeah. We hope we can recover after we address those issues. But now, this May and June, this is actually our hardest time ever in Gree’s history. Now Gree is focused on addressing those issues first.

GamesBeat: Some people have written some stories already about Facebook’s effect on Silicon Valley. The party is over, that sort of thing.

Aoyagi: Yeah. Last year, I saw that it was kind of bubble crazy. But after the Zynga IPO and Facebook IPO, I don’t really know. We’ll just wait for a while. Now it’s a good time for us. We’re generating a lot of cash flow in Japan. The Japanese yen is now very strong, so it’s a good time to maybe double down. Because everybody else, they can’t.

GamesBeat: And the value of things that you acquire can probably be more reasonable.

Aoyagi: Yeah, it is pretty reasonable.

GamesBeat: So what would you predict as far as what happens in the coming months or the rest of this year?

Aoyagi: The rest of the year is going to be pretty interesting. In the next quarter, we’re going to see more content from Asia make it into the U.S. We have seen some success already, including our Zombie Jombie game. Ngmoco has launched one game from Mobage, Rage of Bahamut, which is now the top-grossing in Japan. So now, after talking with many Japanese developers, I get the sense that they’ve become pretty confident about the Western market opportunities. They’re going to ship more and more products from Japan. So some of them, probably, may work in the U.S. market.

We’re going to see more and more high ARPPU games, like the kind that Kabam is doing and Funzio, Gree, and DeNA. The interesting thing is, the Funzio studio is actually Asian-American. Kabam is also. They know about Asian MMOs or social gaming and high ARPPU techniques. There’s an advantage for those kinds of people. We’ll see more and more of those high ARPPU games in the market. So then they’ll continue to spend more on marketing.

It’s going to be a really tough market for startups. By the year’s end, it’s hard as it can be. We have to be really prepared and ready for this year. What happened in Japan in the last two years is that, after they saw some successful games, everybody followed and then the market became very big, very rapidly. In just, like, 18 months. From a $1 billion to a $4 billion market. That kind of big jump, we’re going to see that this year and next year. And then the older market and the conventional games are going to be over by the end of next year. That’s how I see it.

GamesBeat: How do you feel about the head-to-head competition with DeNA, ngmoco?

Aoyagi: In Japan, we’re always compared, but the games they do themselves. Their first-party games are not very strong yet. As a game developer or a game publisher, Zynga is going to be really aggressive with new games. I saw some article about how they’re expanding the scope of the business and they’re highly committed to building the platform out. And also EA. We saw Sims Social, and their content for iPad. They know what they’re doing. I think those Western developers, and also some from Asia, they’re going to be very interesting players in the market. I don’t think DeNA is our competitor in the Western market.

GamesBeat: Zynga’s stock price went up in January on speculation about online gambling. It went up to 15 dollars a share because of that. Now it’s back to five or something. I wondered how much of a factor that’s going to be in the future, in mobile. Lots of people are starting to create casino game startups. They either think that’s a good market, or they think that online gambling will get legalized and those companies will be the ones that benefit.

Aoyagi: I understand why they’re doing those startups. If the regulation changes, that helps them. And they’re disappointed right now about the mobile market opportunities, the cost of user acquisition, pretty serious competition with many people. But we’re very conservative on the gambling stuff. We have to deal with a lot of the regulatory issues in Japan.

At this moment, we don’t have any plan to enter into the gambling business. I do understand what the startups think. But outside the casino, still, there are a number of opportunities, especially on the tablet. So, of course, there’s strong support for non-gambling kinds of stuff, it may be interesting, like with Zynga Poker and those games.

But even outside of gambling, casino stuff, there’s a lot of opportunities. The devices are getting bigger, and now the tablet market is one-third of the iOS market, right? And it’s growing. We’re going to see more and more different devices coming from Apple. On those kinds of screens, you can replace some of the existing console gaming market. So that’s another huge opportunity for us. I think we’re in a good position to do that. So I’m more interested in say, the tablets and the new devices and those opportunities, than in gambling.

GamesBeat: I wonder what kinds of games are going to get popular.

Aoyagi: In the mobile market, it’s not perfect yet. But I know that Western people like those kinds of games. They were very skeptical about the mobile, smartphone opportunities. But with those kinds of bigger devices, like with Infinity Blade, we’ll be seeing more and more of those types of games. That’s another reason why we have a car racing game over there. So that’s part of the message we try to deliver through this E3 booth. We don’t want to just bring content from Japan. We also want to have a variety of content for those upcoming markets.

GamesBeat: I wonder if independent developers are having a tougher time. Zynga dominates on social now. A lot of the bigger social game companies are abandoning the market and coming into mobile.

Aoyagi: Yeah, like CrowdStar.

GamesBeat: Everybody has started to come into mobile games. Apple cracked down on the bots and the third-party marketing, and iOS downloads have dropped 25 percent since January. Since that crackdown on bots and third-party marketing, Apple’s market has been hurt. And that has weakened a lot of the mobile game startups as well. It seems like a tough time for startups. Whereas a year ago it was much better.

Aoyagi: Yeah. Funding, marketing, user acquisition. And then the talent acquisition side, now Zynga, GREE, Kabam, they’ve started hiring people again. So for startup developers, it’s not easy.

GamesBeat: I guess there are lots of companies to buy out there [laughs].

Aoyagi: We’re open, we’re open. We know there is very good talent out there. Yeah. Gree’s open. Gree’s a good company [laughs].

GamesBeat: How many people do you have on staff right now?

Aoyagi: In the U.S., we have 400.

GamesBeat: In the end, how many do you want to have?

Aoyagi: We plan to expand up to 500 right now. But after that … We’re still working on it. Now the hiring situation is pretty good. It’s easy for us. In the last five months, from the beginning of this year, we’ve already hired more than 50 people. And then with Funzio, we added 130 people.

GamesBeat: And the market, is it changing to match your expectations for growth as well? Are the American users spending more money in games?

Aoyagi: We just, in the last 30 days, we’ve become really confident about that monetization part, after we saw Zombie Jombie’s ranking. We’re pretty confident. Especially about the user acquisition. Now we can justify some level of user acquisition cost, so that is very good.

GamesBeat: You still have to plan ahead of that, right?

Aoyagi: Yeah, of course. We can improve some of the KPIs (virality) still. The user acquisition and user engagement numbers that Funzio had are actually pretty good. Better than we had with our Zombie Jombie title. So if we can combine all the best practices, from user acquisition, linkage, monetization, we can be very bullish.

GamesBeat: And if it matches how the Japanese games developed in the past, you can sort of predict how this is going to be in the near future?

Aoyagi: Yeah. It’s going to be the numbers that we had in late 2010. In 2011 it actually doubled. We feel pretty good.

GamesBeat: It’s an opportunity.

Aoyagi: Yeah. Everybody knew that this was a good opportunity. It was just a bit tough for startups. Before Zynga and Gree entered this mobile market, it wasn’t so crowded — and before Apple banned the bots, and cracked down on Tapjoy.

GamesBeat: Do you feel like there’s a difference between the generations of companies here? There are some very early mobile game companies — Digital Chocolate has not done so well, and then EA Mobile is big — but they don’t dominate. And then GameLoft is pretty old as a company, too. Is there a difference with this new generation?

Aoyagi: Yeah, this new mobile-social is a pretty difficult market for the traditional mobile people. They’ve been working on Java or BREW types of stuff. It’s okay, they can use it for the new platforms. But what’s important in this mobile-social is the quality of the operations, including strong applications programming interface (API) structure, analytics infrastructure, or the marketing machine.

What I liked with Funzio was, they already built a very strong social analytics platform for inside the company. And also they’d built a very strong frontend and backend operation in general. It’s easier for companies from online gaming, or companies from Facebook. Funzio pivoted last year from Facebook to mobile. Because they wanted their own e-commerce. Everybody now is coming to mobile. But the companies that started last year, I think they’re in the best position. A better position than the other guys from traditional and mobile.

GamesBeat: They can learn faster, I think.

Aoyagi: Yeah. Still, I think companies from online gaming, Facebook, they have some chances, some opportunities to get in. Like Kabam, they started Kingdoms of Camelot in the last quarter. They spent two months on improvements, and they’re making a lot right now. Companies like Kabam, companies like us, a company like Nexon, other Asian companies, they’re in very good positions.

GamesBeat: HTML 5, people are excited about that. There are also, I guess, several players who are talking a lot about cross-platform games. CrowdStar and Spaceport.

Aoyagi: Spaceport, yeah…

GamesBeat: Zipline Games, Moai, has launched its cross-platform development tool. Is that attractive to you? Does that also take you into the web and Facebook? Or do you actually prefer to stay in mobile? Because cross-platform games can be published across those platforms pretty easily.

Aoyagi: Yeah. I think that the definition of “mobile” is changing these days. From smartphones to tablets, first. Now the iPad is actually a bigger market than Android already. So we’re going to see new types of devices, including TVs. It’s very interesting, because Nintendo, Sony, they’re coming from TVs to tablets, or those mobile devices. We’re now expanding from smartphones to tablets. In the near future, people will have access to those bigger screens. It’s going to be a very good opportunity for us to attack or replace existing, traditional console or online gaming markets.

GamesBeat: TVs are in play.

Aoyagi: Yeah. We’re going to see iOS and Android-based TVs very soon. It’s going to be a big opportunity for us, if we can provide the appropriate games for those devices. Not the same ones we’re providing on smartphones.

GamesBeat: There’s still some debate about whether it’s too slow or not, or if you have to combine it with something.

Aoyagi: Now, with Funzio, their VP of engineering, Andy [Keidel], spent some years at Adobe, so he’s very good at those front-end technologies, including iOS, Android, and Flash. So we’re hiring more and more people for both frontend and backend. On the frontend, we have to use many more different technologies. And then we’re looking at all those, say, cross-platform solutions. That investment in those areas is pretty important for us.

Still, it gets kind of uncertain for everybody. What’s going to be the standard? For a company like us, we can do everything in parallel. Basically, we do try to experiment and then focus on the good things. And then now we see that HTML 5 is working, so that’s pretty good. At the same time, the challenge of new technologies is that those solution providers, they’re upgrading every time. Every six months. This is a new version, and then we have to adapt that, we have to hire people for that engine.

It’s going to slow down our business sometimes. Technology choice is pretty important, but at the same time, time to market is sometimes more important than base technology. We have to find a very good balance to achieve both. Technology leadership and also time to market, shipment, the right timing.

We’re not singling out only one technology, but, for example, Unity Technologies — they have to update every time Apple updates their iOS or the system. There’s a time lag. So from a developer’s standpoint, if they’re 100 percent focused on one technology, that’s a significant risk. They might lose some opportunity because of their technology choice. So that has a risk that you should take into account. That’s one big question. And it’s a challenge for those companies. While cross-platform sounds like a really good opportunity, at the same time, now the market is really crowded. So there’s no perfect solution. We don’t believe that. Time to market is sometimes, in this kind of situation, more important. That’s my market sense.

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